Question

RamsayRamsay Travel offers helicopter service from suburban towns to John F. Kennedy International Airport in New York City. Each of its 12 helicopters makes between 900 and 1,500 ​round-trips per year. The records indicate that a helicopter that has made 900​round-trips in the year incurs an average operating cost of ​$750 per​ round-trip, and one that has made 1,500 ​round-trips in the year incurs an average operating cost of ​$600 per​ round-trip.

1. Using the​ high-low method, estimate the linear relationship y=a + bX, where y is the total annual operating cost of a helicopter and X is the number of​ round-trips it makes to JFK airport during the year.
2. Give examples of costs that would be included in a and in b?
3. If RamsayRamsay Travel expects each helicopter to​ make, on​average, 1,200
round-trips in the coming​ year, what should its estimated operating budget for the helicopter fleet​ be?

Answer 1

1) y = 337,500 + 375X

variable costs per trip (per helicopter) = $375 per trip

fixed costs = $337,500

2) fixed costs (a) include depreciation expenses, licences, insurance, etc., while variable costs include fuel, salaries (if pilots are paid per flight), etc.

3) operating budget for the whole fleet (12 helicopters) = $9,450,000

Step-by-step explanation:

variable costs per trip (per helicopter) = ($900,000 - $675,000) / (1.500 - 900) = $225,000 / 600 = $375 per trip

fixed costs = $900,000 - (1,500 x $375) = $900,000 - $562,500 = $337,500

the estimated operating budget per helicopter = $337,500 + (1,200 x $375) = $337,500 + $450,000 = $787,500

operating budget for the whole fleet (12 helicopters) = 12 x $787,500 = $9,450,000